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Hedge Fund Activism

Hedge Fund Activism

Hedge Fund Activism

Hedge funds are engaging in a form of shareholder activism and monitoring that differs fundamentally from previous activist efforts by other institutional investors. Several studies show that when institutional investors, particularly mutual funds and pension funds, follow an activist agenda, they do not achieve significant benefits for shareholders (Karpoff (2001), Romano (2001), Black (1998), and Gillan and Starks (2007)).

Research by Brav, Jiang, Partnoy and Thomas (2008); Klein and Zur (2008) suggested that the opposite is true of hedge funds. Unlike mutual funds and pension funds, hedge funds may be able to influence corporate boards and managements due to key differences arising from their different organizational form and the incentives that they face. Hedge funds employ highly incentivized managers who manage large unregulated pools of capital.

Because they are not subject to regulation that governs mutual funds and pension funds, hedge funds can hold highly concentrated positions in small numbers of companies, and use leverage and derivatives to extend their reach. Hedge fund managers also suffer few conflicts of interest because they are not beholden to the management of the firms whose shares they hold. After the financial crisis, hedge funds have been subject to some new regulation, including limited disclosures to regulators, but those have not fundamentally altered their business. In sum, hedge funds are better positioned to act as informed monitors than other institutional investors.

Brav, Jiang, Partnoy and Thomas (2008) find that hedge fund activists tend to target companies that are typically “value” firms, with low market value relative to book value, although they are profitable with sound operating cash flows and return on assets. Payout at these companies before intervention is lower than that of matched firms. Target companies also have more takeover defenses and pay their CEOs considerably more than comparable companies. Relatively few targeted companies are large-cap firms, which is not surprising given the comparatively high cost of amassing a meaningful stake in such a target. Targets exhibit significantly higher institutional ownership and trading liquidity. These characteristics make it easier for activists to acquire a significant stake quickly.

Clifford (2008), Brav, Jiang, Partnoy and Thomas (2008), Bebchuk, Brav and Jiang (2013), Klein and Zur (2009), and Becht, Grant and Wagner (2014), and others, suggest that hedge fund activism generates significantly higher announcement period abnormal stock returns than a control sample of passive block holders, and that hedge fund activists have achieved measurable success, at least in terms of traditional metrics such as Tobin’s Q. Bebchuk, Brav and Jiang (2013) find that hedge fund activism through 2007 was followed by improved operating performance during the post-intervention 5-year period.

Studies of the first wave of hedge fund activism suggested that activism might be in decline as the market for activism grew, competition increased, and the most viable opportunities for interventions declined. Brav, Jiang, Partnoy and Thomas (2008), for example, found that as hedge fund activism became more common, the average abnormal returns at the filing of a Schedule 13D dropped, from 15.9% in 2001 to 3.4% in 2006. However, Krishnan, Partnoy and Thomas (2016) find that top hedge fund activists were able to achieve continued success in the face of increased competition by acquiring a reputation for having the ability to pressure managers in credible ways.

The long term effects of hedge fund activism are hotly debated. DeHann, Larcker and McClure (2018) find pre- to post activism returns are insignificantly different from zero and further find no evidence of abnormal post-activism performance improvements. Bebchuk, Brav and Jiang (2015) argue that policy makers should not accept claims that hedge fund activism is costly to firms and their shareholders in the long term.

There is an extensive literature on hedge fund activism which is summarized in Bebchuk, Brav and Jiang (2015); Brav, Jiang and Kim (2009); Coffee and Palia (2015). The international aspects of hedge fund activism have also been explored extensively in Becht, Franks, Grant and Wagner (2015); Becht, Franks and Grant (2010).

This page is intended as a resource for issues pertaining to activism and corporate governance as examined through the disciplines of economics, business strategy, law and other areas.

Hedge fund activism is associated with improvements in the governance and performance of targeted firms. In this paper, we show that these positive effects of activism reach beyond the targets, as non-targeted peers make similar improvements...Read more

Hedge fund activism has been identified in the USA as a driver of enduring corporate governance change and market perception. We investigate this claim in an empirical study to see whether activism produced similar results in Japan in four...Read more

Buying and campaigning for control encounter different forms of free-riding behavior in widely held firms. We derive implications of this difference in a model with effort provision: First, changes in the marginal return to effort move bidder...Read more

Few doubt that hedge fund activism has radically changed corporate governance in the United States -- for better or for worse. Proponents see activists as desirable agents of change who intentionally invest in underperformingcompanies to...Read more

Hedge funds have become active in corporate governance. They push for changes in strategy and the adoption of specific business plans. Their tactics include buying shares, conducting public campaigns, lobbying managers and other shareholders,...Read more

This paper looks at shareholder activism from the perspective of the revision of the EU Shareholder Rights Directive, which was approved by the European Parliament on 14 March 2017. The main findings are as follows.

Blockholder monitoring is central to corporate governance, but blockholders large enough to exercise significant unilateral influence are rare. Mechanisms that enable small block-holders to exert collective influence are therefore important. We...Read more

We analyze dynamic trading by an activist investor who can expend costly effort to affect firm value. We obtain the equilibrium in closed form for a general activism technology, including both binary and continuous outcomes. Variation in...Read more

This chapter reviews the single high profile case in which twentieth century antitakeover law has come to bear on management defense against a twenty-first century activist challenge?the Delaware Court of Chancery?s decision to sustain a low-...Read more

This paper challenges the view that foreign investors lead firms to adopt a short-term orientation and forgo long-term investment. Using a comprehensive sample of publicly listed firms in 30 countries over the 2001-2010 period, we find instead...Read more

This article discusses the policy response to hedge funds activism in corporate governance based on Hirschman?s classic: Exit, Voice and Loyalty. From that perspective, the article argues that hedge funds do not create the loyalty concerns...Read more

This paper provides evidence on the incidence, characteristics, and performance of activist engagements across countries. We find that the incidence of activism is greatest with high institutional ownership, particularly for U.S. institutions. We...Read more

Hedge fund activism has increased almost hyperbolically. Some view this optimistically as a means for bridging the separation of ownership and control; others are more pessimistic, seeing mainly wealth transfers from bondholders or speculative...Read more

We develop a dual-layered agency model to study blockholder monitoring byactivist funds that compete for investor flow. Competition for flow affects themanner in which activist funds govern as blockholders. In particular, funds...Read more

We look at the reaction to hedge fund activism of managers and shareholders in Japanese firms and explore the implications of our findings for agency theory. We use a qualitative research design which treats the standard agency-theoretical model...Read more

This is a draft chapter for a forthcoming volume, The Research Handbook on Shareholder Power, edited by Randall Thomas and Jennifer Hill (Cheltenham:Edgar Elgar). This chapter describes the experience with activist institutional investors in an...Read more

The forthright brand of shareholder activism hedge funds deploy became during the 2000s a significant feature of Canadian corporate governance. This paper examines hedge fund activism ?Canadian style.? The paper characterizes the interventions...Read more

Shareholder activism by hedge funds has over the past few years become a major corporate governance phenomenon. This paper puts the trend into context. The paper begins by distinguishing the “offensive” form of activism hedge funds engage in from...Read more

Hedge fund activism is a new form of arbitrage. Using a large hand-collected data set from 2001 to 2006 we find that activist hedge funds in the U.S. propose strategic, operational, and financial remedies and attain success or partial success in...Read more

This article reports a unique analysis of private engagements by an activist fund. It is based on data made available to us by Hermes, the fund manager owned by the British Telecom Pension Scheme, on engagements with management in companies...Read more

Using a large hand-collected dataset from 2001 to 2006, we find that activist hedge funds in the U.S. propose strategic, operational, and financial remedies and attain success or partial success in two thirds of the cases. Hedge funds seldom seek...Read more

The paper analyzes 362 European activist interventions by hedge funds, focus funds and other activist investors from 2000 to 2008. The sample includes both public and private interventions. The private interventions are based upon proprietary...Read more